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Federal Reserve System

Updated February 13, 2020

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Federal Reserve System essay

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.. banking system. A major component of the System is the Federal Open Market Committee (FOMC), which is made up of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks, who serve on a rotating basis, The FOMC oversees open market operations, which is the main tool used by the Federal Reserve to influence money market conditions and the growth of money and credit. Two other groups play roles in the way the Federal Reserve System works; depository institutions, through which the tools of monetary policy operate, and advisory committees, which make recommendations to the Board of Governors and to the Reserve Bans regarding the Systems responsibilities.

The Board of Governors The Board of Governors of the Federal Reserve System was established as a federal government agency. It is made up of seven members appointed by the President of the United States and confirmed by the United States Senate. The full term of a Board member is fourteen years; the appointments are staggered so that one term expires on January 31 of each even-numbered year. After serving a full term, A board member may not be reappointed, If a member leaves the Board before his or her term expires, however, the person appointed and confirmed to serve the remainder of the term may later be reappointed to a full term. The Chairman and Vice Chairman of the board are also appointed by the President and confirmed by the Senate. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board.

The terms for these positions are four years. A Washington staff of about 1,700 supports the Board of Governors. The Boards responsibilities require thorough analysis of domestic and international financial and economic developments. The Board carries out those responsibilities in conjunction with other components of the Federal Reserve System.

It also supervises and regulates the operations of the Federal Reserve Banks and their Branches and the activities of various banking organizations, exercises broad responsibility in the nations payments system, and administers most of the nations laws regarding consumer credit protection. The Federal Reserve System conducts monetary policy using three major tools: Open market operations-the buying and selling of U.S. government (mainly Treasury) securities in the open market to influence the level of reserves in the depository system. Reserve requirements-requirements regarding the amount of funds that commercial banks and other depository institutions must hold in reserve against deposits.

The discount rate-the interest rate charged commercial banks and other depository institutions when they borrow reserves from a regional Federal Reserve. Policy regarding open market operations is established by the FOMC. However, the Board of Governors has sole authority over changes in reserve requirements, and it must also approve any change in the discount rate initiated by a Federal Reserve Bank. The Federal Reserve also plays a major role in the supervision and regulation of the U.S. banking system.

Banking supervision-the examination of institutions for safety and soundness and for compliance with law-is shared with the Office of the Comptroller of the Currency, which supervises national banks and the Federal Deposit Insurance Corporation, which supervises state banks that are not members of the Federal Reserve System. The Boards supervisory responsibilities extend to the roughly 1,000 state bands that are members of the Federal Reserve System, all bank holding companies, the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Act and agreement corporations (the institutions that engage in a foreign banking business). Monetary Policy and Effects of on the Economy Using tools of monetary policy, the Federal Reserve can affect the volume of money and credit and their price-interest rates.

In this way it influences employment, output, and the general level of prices. The Federal Reserve Act lays out the goals of monetary policy; the Federal Reserve System and The Federal Open Market Committee should seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Monetary policy works through the market for reserves and involves the federal funds rate. A change in the reserves market will trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit in the economy, and levels of employment, output and prices. For example, if the Federal Reserve reduces the supply of reserves, the resulting increase in the federal funds rate tends to spread quickly to other short-term market interest rates, such as those on Treasury Bills and commercial paper.

A change in short-term rates will also translate into changes in long-term rates on such financial instruments as mortgages, corporate bonds, treasury bonds, especially if the change in short-term rates is expected to persist. A rise in short-term rates that is expected to continue will lead to a rise in long-term rates. Higher ling-term interest rates will reduce the demand for items that are most sensitive to interest cost, such as housing, business investment, and durable consumer goods. Higher mortgage rates depress the demand for housing, Higher corporate bond rates increase the cost of borrowing for businesses and thus, restrain the demand for additions to plants and equipment; and tighter supplies of bank credit may constrain the demand for investment goods by those firms particularly dependent on bank loans. Higher interest rates also reduce consumer demand for such items as cars, and they also will effect the value of household assets-such as stocks, bonds, and land.

The implications of changes in interest rates extend beyond domestic money and credit markets. If the interest rates in the U.S. move higher in relation to those abroad, holding assets denominated in U.S. dollars become more appealing, and the demand for dollars in foreign exchange markets increases. A result is upward pressure on the exchange value of the dollar.

With flexible exchange rates the dollars strengthens, the cost of imported goods to Americans declines, and the price of U.S. produced goods to people abroad rises. As a consequence, demands for U.S. goods are reduced as Americans are induced to substitute goods from abroad for those produced in the United States and people abroad are induced to buy fewer American goods. Such changes in the demand for goods and services get translated into changes in total production and prices.

Closing Thoughts There are so many different views on the impact that the Federal Reserve has on the National and Global Economy. Many feel that the Fed generally lowers rates to stimulate consumption and lowering rates would prevent the U.S. from becoming part of a global slump. A rise in rates is typically matched by the prime rate set by banks and by short-term interest on Treasuries. Eventually, those higher rates brake the economyand cool inflationary tendencies. There are these that actually feel that those who control this countrys money inherently control this country.

They feel that to 1% of the population rules the other 99 to 99.5% of the population. They say that rulership is achieved through direct control of this nations private economy, In addition, the elite of U.S. society controls the national communications media as well as the executive branch of the federal government by virtue of the Federal Reserve. I feel that the latter is on the radical side of thinking, and that overall the Federal Reserve has the best interest of the nation and international economy in all their decisions regarding the increases in interest rates, etc. Since the onset of the Federal Reserve we have not gone into a depression, and over a course of time there will be times when our economy will peak and boom and the Fed will feel that it is time to slow the economy by raising the rates, as in the course of the last six months.

Bibliography A Monetary History of the United States, 1867-1960 By Milton Friedman and Anna Jacobson Schwartz, Princeton, 1963 last printing 1993 Managerial Economics, Thomas Hailstones and John Rothwell, Prentice Hall, 1985 Encyclopedia Britannica

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Federal Reserve System. (2019, Nov 15). Retrieved from